Hung Up By Uncle Sam

Museums Find New Tax Law Deducts From Their Collections

Donations of art and other objects to American museums have declined substantially since the Tax Reform Act of 1986, two studies by arts organizations maintain.

Museums had feared that such a decline would result from the amended tax law, which reduced deductions for donating property that has appreciated, and the studies provide the first figures purporting to document the decline.

In one recently released study, the American Association of Museums sampled 274 of its 2,200 member institutions. Sixty of the institutions sampled were art museums.

The study found that the value of objects donated in 1987 was $12.7 million less than in 1986, a decline of 32.8 percent. In 1987, the study found, 38,000 fewer objects were donated to those museums than in 1986.

Over the same period, gifts of appreciated property in the form of securities or real estate declined to $4.8 million from $10.5 million, the study reported.

Projecting these figures to its entire membership, the association estimated that the value of objects donated nationwide fell by $31.5 million, or 30.3 percent, and that 162,000 fewer objects were donated.

The projected decline in gifts of appreciated securities and real estate was not available.

The second study, by the Association of Art Museum Directors, focused on art museums alone.

It found that the value of donations declined by $161 million, or 63 percent, from 1986 to 1988 for the 116 institutions reporting.

To help reverse this trend, a bill favored by many arts organizations and introduced in Congress by Rep. Bill Frenzel (R., Minn.), a member of the House Ways and Means Committee, would amend a provision of the tax law called the alternative minimum tax.

Before 1986, art givers could deduct the full appreciated value of donated property, but under the alternative minimum tax only the original cost of the property may be deducted.

If, for example, a collector paid $10,000 for a painting 20 years ago, and it is now worth $100,000, he would now be allowed to deduct only the $10,000 originally paid.

But Rep. Sidney R. Yates (D., Ill.), a powerful spokesman for the arts in Congress, said he favored the alternative minimum tax, with all of its inclusions, ``because formerly there were too many `outs` for the wealthy.``

More damaging to museums than the alternative minimum tax, he said, is the reduced tax structure itself, with its 28 percent maximum. ``With lowered taxes,`` he said, ``people are just not as interested in making donations.``

The alternative minimum tax was created to prevent abuses by taxpayers who formerly could pare their taxable income by taking advantage of various deductions, including that for appreciated property like art.

The tax is figured by computing the taxpayer`s regular tax liability, including deductions of property at their appreciated value, at the normal rate of 28 percent.

The computation then is recalculated, adding back a series of tax

``preference`` deductions, including the value of donated property. The sum of these amounts, known as the alternative minimum taxable income, then is reduced by a statutorily prescribed exemption amount and taxed at the rate of 21 percent. Of the two computations, the taxpayer pays the higher one.

Since most taxpayers do not know before the year ends whether they will be subject to the alternative minimum tax, museum officials say the tax has generated what they call a ``chill factor,`` meaning that potential contributors are afraid to make year-end donations, as they used to do.

Museum officials also are tying the lag in art donations to the powerful lure of inflated art market prices. They cite the case of the Van Gogh painting ``Irises,`` which in 1987 was sold at Sotheby`s for $53 million rather than being given to Westbrook College in Portland, Me., to which it had long been promised.

The painting`s owner, John Whitney Payson, said at the time that he was selling the painting because of changes in the tax law and the ``unprecedented spiral`` in art prices.

``It`s a double whammy for us,`` said Ashton Hawkins, executive vice president of the Metropolitan Museum of Art in New York. ``For many major donors, selling at today`s prices would bring a lot of money, even though they have to pay a tax on it. If they give to museums, the fair market value deduction they once got is virtually wiped out by the alternative minimum tax. Therefore, people are holding off making gifts, and at the same time the inflated art market makes it all but impossible for museums to buy.``

At the Metropolitan, which reports a decline of 66 percent in the dollar value of donations of appreciated art between 1986 and 1988, officials said that gifts of significant value have virtually come to a halt except for those from donors who are fulfilling long-term commitments.

The Museum of Modern Art in New York also reported a slump in donations of roughly 58 percent between 1986 and 1988. Officials of both museums declined to reveal dollar figures.